Deck 4: Supply and Demand

Question 1

Explain the following statement: "The invisible hand pushing toward a supply/demand equilibrium would be thwarted by social and political forces pushing in the other direction." Give examples on the social force and political force that the statement refers to.

Answer 1

The term equilibrium that is used in an economics course refers to the state where the quantity supplied equals the quantity demanded,without any considerations to social and political forces.Very often,social and political forces exist,and they provide a counter pressure to the dynamic forces of demand and supply.The result could be an equilibrium with a persisting excess supply or excess demand if the market were defined in reference to economic forces.An example of a political force is the U.S.agricultural price support program that guarantees farmer a high price for their products.An example of a social force is the refusal by some people to accept jobs that are perceived by the society as "inappropriate," such as cleaning bathrooms in a public place.

Question 2

The diagram below represents the producer side of the market for skateboards in New York.The current price of skateboards is P_A.Each of the events described below will have some impact on the supply of skateboards.For each event,draw a picture to illustrate the effect of the event.Be sure to explain your pictures using pertinent economic terminology ("movement along" or "change in quantity").
(a)A drop in the price of skateboards.
(b)An increase in the price of wheels used in the manufacturing of skateboards.

Answer 2

(a)The diagram: A drop in the price of skateboards,say from P_A to P_B,results in a movement downward along the supply curve,such as shown above from A to B,resulting in fewer skateboards offered for sale (Q_A to Q_B).Using economic terminology,this is referred to as a decrease in the quantity supplied.(b)The diagram: An increase in price of wheels used in making the skateboards means the cost of manufacturing skateboards increases.This results in a shift up (left)of the supply curve for skateboards,from S to S'.At the original price of P_A,sellers were willing to supply the quantity at Point A on supply S but now are willing to sell the quantity at Point B on S'.Using economic terminology,this leftward shift of the supply curve is referred to as a decrease in supply.

Question 3

John and Steve are roommates at Siberian University.They are planning to have a party this coming weekend and need to go shopping for snacks.They know all of their friends like nacho cheese flavored tortilla chips,so that is the only type of snack they plan to buy.After pooling their cash,they take $18 and head out to the nearest grocery store.Walking down the chip aisle,they fill their cart with 6 bags of Tostada brand chips at $3 per 14-ounce bag.Continuing down the chip aisle,they see Durango brand chips are available at $2 per 14-ounce bag,so they put all of the Tostada chips back and instead purchase 9 bags of Durango chips.Is John and Steve's behavior consistent with "the law of demand"? Explain.(Extra Credit: If they hadn't changed their minds,would they have violated the law of demand?)

Answer 3

Yes,John and Steve's behavior is consistent with the law of demand.The law of demand states that more of a good will be demanded the lower its price,other things constant.John and Steve increased the number of bags of chips purchased from 6 to 9 as the price went down from $3 per bag to $2 per bag.The specific things being held constant are the amount of money John and Steve have to spend and the quality of the two brands of chips (i.e.,Tostada and Durango chips taste the same).(If they hadn't changed their minds they would not have necessarily violated the law of demand if they do not believe Durango chips are as good as Tostada chips.)

Question 4

What are the "other things constant" when drawing a demand curve? What are the "other things constant" when drawing a supply curve?

Question 5

Explain the error in the following statement: "For the past 10 years,the prices of automobiles have been rising and each year people have purchased more autos.Price and quantity demanded are directly related and the economists' law of demand is incorrect."

Question 6

How is the "Law of Demand" different from the "Law of Supply"? In what ways are they similar to each other?

Question 7

What are normal goods? What are inferior goods? Give an example of each type.

Question 8

What is equilibrium? Explain what it means to say equilibrium is a characteristic of the model,not a state of the world.

Question 9

Explain what it means to say that the cotton market is in "equilibrium." What forces (other than market forces)can be involved in determining the equilibrium price of cotton?

Question 10

In 2006,Bob's Burgers charged $3.50 for a quarter-pound hamburger with all the fixin's,and sold 7,500 of them.In 2007,although Bob raised the price to $3.75,sales of his burgers rose to 8,200.Use the concepts of a shift in the demand curve versus a movement along the demand curve to explain why this increase in sales does not represent a violation of the law of demand.

Question 11

Consider the following demand table,which represents the demand for comic books by John,Liz,and Alex.
(a)Fill in the "market demand" column of the above table.
(b)Use the grid below to draw the demand curves for comic books of John,Liz,and Alex.Then draw in the market demand curve.
(c)Notice that Liz's demand is everywhere to the right of Alex's demand.Can you conclude from this that Liz likes comic books more than Alex does? Explain.

Question 12

Consider the following supply table,which represents the supply of comic books by Bill,Judy,and Sally.
(a)Fill in the "market supply" column of the above table.
(b)Use the grid below to draw the supply curves for comic books of Bill,Judy,and Sally.Then draw in the market supply curve.
(c)Compare the supply curve you have drawn for Sally and Judy.Which of these two is more influenced by increases in the price of comic books? Explain.

Question 13

Stuffed-Crust Pizza is a new pizza introduced by Pizza Hut.What happens to the equilibrium price and equilibrium quantity of Stuffed-Crust Pizza in each of the following situations?
a.Due to weather conditions,the output of wheat decreased and the price of wheat flour increased.
b.The price of beer decreased.
c.Domino's Pizza introduced a similar pizza that sold for $1 less than the one sold by Pizza Hut.
d.A recession reduced households' income.
e.A new oven technology reduced the time it takes to bake a pizza.

Question 14

Given the following individual demand tables for individuals A-D,construct a market demand curve.

Question 15

The diagram below represents the consumer side of the market for skateboards in New York.The current price of skateboards is P_A.Each of the events described below will have some impact on the demand for skateboards.For each event,draw a picture to illustrate the effect of the event.Be sure to explain your pictures using pertinent economic terminology ("movement along" or "shift in").
(a)A drop in the price of skateboards.
(b)A drop in the price of kneepads.
(c)A decline in income.

Question 16

Demonstrate graphically and explain the difference between an increase in the quantity demanded and an increase in demand.Describe what might have caused each to occur.

Question 17

In 2008,the price of soybeans was $3.50 a bushel,and the Jones family farm planted 7,500 acres of them.In 2009,although the price of soybeans fell to $3.25 a bushel,the Jones family farm planted 8,200 acres of them.Use the concepts of a shift in the supply curve versus a movement along the supply curve to explain why this increase in soybean acreage does not represent a violation of the law of supply.

Question 18

Use examples to demonstrate why the ability of consumers and producers to substitute explains the behavior that we call the "Law of Demand" and the "Law of Supply"?

Question 19

Demonstrate graphically and explain the difference between a decrease in the quantity supplied and a decrease in supply.Describe what might have caused each to occur.

Question 20

What is meant by "the fallacy of composition"? Because of the fallacy of composition,it is not possible to apply the microeconomic analysis of individual firms and consumers directly to the macroeconomic analysis of entire nations.Explain why this is so.

Question 21

Demonstrate graphically and explain verbally the concept of excess demand.Is price above or below equilibrium?

Question 22

The market for Columbian coffee beans is given in the diagram below.The market is currently in equilibrium with a price of P₀ and a quantity exchanged of Q₀.Suppose that the Columbian government takes over the production and distribution of all coffee beans grown in Columbia.In an effort to increase revenue from the sales of coffee beans,the government decides to raise the price above P₀.Describe why it would take more effort for the government to raise the price to P₂ than it would for it raise the price to P₁.

Question 23

Consider the following supply and demand picture of the market for Oreos.Note that the market is currently in equilibrium,with a price of P* and a quantity exchanged of Q*.
For each of the scenarios below,draw a picture that illustrates the impact on price and quantity exchanged.Explain each of your pictures by describing what is happening to the supply side of the market.
(a)The price of Hydrox cookies goes down.
(b)Due to a disastrous growing season,the price of cocoa triples.

Question 24

Consider the following supply and demand diagram for Tootsie Rolls.Note that the market is currently in equilibrium,with a price of P* and a quantity exchanged of Q*.
For each of the scenarios below,draw a picture that illustrates the impact on price and quantity exchanged.Explain each of your pictures by describing what is happening to the demand side of the market.
(a)The American Association of Chocolate Lovers designates the Tootsie Roll as its official candy.
(b)The Tootsie Roll Company computerizes their Tootsie Roll manufacturing plant,lowering unit costs of production.

Question 25

Consider the supply and demand schedules below to answer the questions that follow:
$\begin{array}{ccc}\text {price }&\text {qty.demanded }&\text {qty. supplied }\\\hline \$10 & 0 & 10 \\9 & 1 & 9 \\8 & 2 & 8 \\7 & 3 & 7 \\6 & 4 & 6 \\5 & 5 & 5 \\4 & 6 & 4 \\3 & 7 & 3 \\2 & 8 & 2 \\1 & 9 & 1\end{array}$
(a)In a free market,what will the equilibrium price be?
(b)What will the equilibrium quantity demanded and quantity supplied be?
(c)If price were $2,what would happen? (Discuss in terms of adjustment to equilibrium.)
(d)If price were $7,what would happen? (Discuss in terms of adjustment to equilibrium.)
(e)If price were $5,what would happen? (Discuss in terms of adjustment to equilibrium.)

Question 26

Demonstrate graphically and explain verbally the concept of excess supply.Is price above or below equilibrium?

Question 27

The table below shows the quantity demanded and quantity supplied of DVDs at each price level.
(a)Fill out the column entitled Surplus/Shortage.
(b)What are the equilibrium price and equilibrium quantity in this market?
(c)Suppose that consumers' taste changed in favor of DVDs due to their high quality.What happens at the original equilibrium price level calculated in Part (b)?
(d)Suppose that advances in technology reduced the production cost of DVD players.What happens at the original equilibrium price level calculated in Part (b)?

Question 28

Demonstrate graphically and explain verbally the concept of equilibrium in a supply and demand model.

Question 29

A change in a shift factor of demand will actually cause both a change in quantity supplied and a change in quantity demanded.Explain why,and demonstrate with a graph.

Question 30

Given the following individual supply tables for individuals A-D,
(a)Construct a market supply curve.
(b)Demonstrate a movement along the market supply curve.
$$\begin{array} { | r | r | r | r | r | } \hline \text { Price } & \text { A } & \text { B } & \text { C } & \text { D } \\\hline .50 & 0 & 1 & 9 & 3 \\\hline 1.00 & 0 & 2 & 2 & 4 \\\hline 1.50 & 0 & 3 & 4 & 5 \\\hline 2.00 & 5 & 4 & 6 & 6 \\\hline 2.50 & 5 & 5 & 8 & 7 \\\hline 3.00 & 5 & 6 & 10 & 8 \\\hline\end{array}$$